By BRIAN FALLOW
Deciding whether New Zealand should ratify the Kyoto Protocol to curb global warming should be a no-brainer.
Under the protocol, New Zealand's plantation forests will earn it more carbon credits (rights to emit greenhouse gases) than it will need to cover the excess in emissions over its agreed cap, perhaps twice as many.
In theory, New Zealand could ratify and then do nothing until 2012, when it could peel off some of its wad of forest sink credits to discharge its national obligations under the treaty, with plenty left to sell or bank for use later.
Although that would do nothing to reduce emissions, and environmentalists would be unimpressed for that reason, it would reflect the fact that New Zealand removes greenhouse gases from the atmosphere faster than it adds them.
Why, then, are we looking this gift horse in the mouth?
It is because the Government has said that it will not hoard forest sink credits and use them to shield New Zealand emitters from the international price of carbon.
One problem with that undertaking is that it has been made with no internal debate or mandate.
Another is that it assumes a liquid and efficient international market in carbon will develop, to discover the marginal cost of reducing emissions.
But that has been in doubt since March, when the United States pulled out of the Kyoto Protocol. Because of the yawning gap between its Kyoto targets and its likely emissions on a business-as-usual basis, the US would have been much the largest buyer of carbon.
It was also expected to devolve to companies the obligation to hold carbon credits and the right to trade them, ensuring a deep and liquid market.
But as things now stand, Garry Law, a consulting engineer who heads the Environmental Defence Society's climate change group, points to several troubling features of the "carbon market" to come.
The supply side will be dominated by one seller, Russia.
Since 1990, which is the Kyoto Protocol's year zero, the Russian economy has imploded. So many of its smokestacks have gone cold that its emissions are about a third below 1990 levels.
That leaves it with an excess of credits, "hot air" in the jargon, which would dwarf other sources of supply like New Zealand.
"It is very likely to have more credits than the market can bear without the United States. So it will withhold some of its credits to keep the price up," Mr Law said.
Dr Suzi Kerr, director of the economic and public policy research house Motu, has studied the use of the use of emissions trading to achieve environmental goals. (The US has used it to curb sulphur dioxide emissions, which cause acid rain.)
Dr Kerr said modelling by the Massachusetts Institute of Technology indicated that the carbon price could go as low as $US2 a tonne with the US out of the market and Russia selling all its surplus.
A price so low would add only a fraction of a cent per litre to the cost of transport fuels.
However, Mr Law said Russia faced challenges in getting its credits to market.
"There are some prerequisites for trading in terms of having credible inventories of emissions. The Russian Federation is not strong on disclosure and statistics. For example, it claims to flare no natural gas. Satellite pictures show otherwise.
"It is possible their credits may not come promptly to market because of the preconditions to be met."
Dr Kerr said that if the price were too low, it would not be acceptable in European circles, so they were liable to do something to avoid that.
The European Commission has designed an intra-European emissions trading regime, yet to be approved by member Governments, which would be open to non-EU countries which are parties to Kyoto.
But Mr Law said others would be able to trade there only on Europe's terms, after agreements were struck at the national level.
Traditionally, the Europeans have wanted Kyoto targets to be met through emission reductions rather than use of forest sinks or Russian hot air.
They also have a preference for another mechanism allowed under Kyoto - financing projects in developing countries which would reduce their emissions compared with some alternative which would otherwise have happened.
Dr Kerr said no one really had much idea of how many of those "clean development mechanism" credits would be available, and the extent to which they could limit Russia's market power.
Another source of uncertainty arises from the fact that carbon credits can be banked from the first commitment period (2008 to 2012) to be used later. The value of banked credits is likely to be driven by perceptions of where US policy on climate change and the Kyoto Protocol in particular is heading
"It must be doubtful the Kyoto Protocol could be sustained into a second commitment period without the United States," Mr Law said. "Its requirement for coming in will very likely be commitments from many more industrialising nations."
He concludes that New Zealand entities other than the Government trading internationally would be very small fish in a perilous sea.
Where does that leave the policy of exposing New Zealand emitters to the international price of greenhouse gas emission?
If a carbon tax were imposed, it would be hard to know where to set the rate, Mr Law said. "And if responsibility for emissions trading is devolved to individual firms, we would be exposing them to a potentially very volatile market."
Dr Kerr said the danger was that with only one major seller and with the buying side more likely to be made up of Governments than companies, the international market would be more politically motivated and controlled, "which is unlikely to lead to a liquid market and a clearly defined price".
Trading between Governments would be such big trades that they would not be at the marginal price.
"You would be trading at some sort of bulk price, which does not give you the information you want from the market [about the marginal cost of reducing emissions]."
Much as businesses would like it, the prospects of a reliable price signal before 2008 were pretty low, Dr Kerr said.
"With the sulphur dioxide market in the States, there was very little trading before the programme started and prices were all over the place. "
But as soon as people had to trade, prices stabilised rapidly.
Dr Kerr questions the rationale for distributing forest sink credits to the owners of Kyoto forests (those planted since 1990 on land not already forested) as a windfall.
It would be a free lunch that would not affect their behaviour in the future.
If the Government kept them instead, it could distribute the benefits throughout the economy, offsetting the cost of complying with Kyoto.
But forest owners should get marginal credits, she said, earning credits for expanding the forest estate.
Similar arguments apply against grandfathering emission units to emitters. It would increase those companies' wealth, without affecting whether their marginal costs of production were sustainable in a carbon-constrained future.
Intergovernmental Panel on Climate Change (IPCC)
United Nations Environment Program
World Meteorological Organisation
Framework Convention on Climate Change
Executive summary: Climate change impacts on NZ
IPCC Summary: Climate Change 2001